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P. Devarajan

Has the sharp rise in housing loans triggered off a corresponding boom in other sectors? ? Have linkages been built between the housing and other sectors?

THE liquidity in the banking system is highenough to meet the country's growth requirements and it should hopefully go into the right sectors, says Mr V. Leeladhar, Deputy Governor, RBI.

Banks are parking over Rs 10,000 crore surplus funds in reverse repo with the RBI and Rs 69,026 crore (as per CMIE, June 2005) have been trapped by the MSS operated by the RBI.

Yet, yields on debt paper are inching up in the market despite inflation being below 6 per cent and this, indeed, is surprising.

It is hard to reason out the upward movement in interest rates when, in fact, they should be going down.

Banks and housing companies have marked up the price of housing loans on the excuse that money markets are getting tight. But banks do not access the money markets to lend for housing, while housing companies do turn to the financial markets.

Reports are that some banks have been looking to mark up their sub-PLR lending rates for corporates and others, and all this could start a high interest regime, pinching growth.

With treasury profits down for the last two years, banks have gone into retail lending, with housing being the safest bet.

"Retail lending has turned out to be a key profit driver for banks, with retail portfolio constituting 21.5 per cent of total outstanding advances as on March 2004. The overall impairment of the retail loan portfolio worked out much less than the gross NPA ratio for the entire loan portfolio. Within the retail segment, the housing loans had the least gross asset impairment. In fact, retailing makes ample business sense in the banking sector," says Ms. Shyamala Gopinath, Deputy Governor, RBI, in her article `Retail Banking - Opportunities and Challenges' published in the RBI Bulletin (June 2005).

Between 1993 and 2004, outstanding housing loans by banks and housing finance companies grew at a trend rate of 23 per cent. The share of housing loans in the total non-food credit of banks has moved up from about 3 per cent in 1992-93 to about 7 per cent in 2003-04.

Recent data show that non-priority sector housing loans outstanding as on February 18, 2005 were around Rs 74,000 crore, which is 8 per cent of gross bank credit. The share of housing loans in total non-food credit has risen from about 3 per cent in 1992-93 to about 7 per cent in 2003-04.

Ms Gopinath tags a few concerns to the happy story. "While no immediate financial stability concerns exist, there is a need to put in place appropriate risk management systems, strengthen internal control procedures and also improve regulatory oversight in this area. Banks also need to monitor their exposure and the credit quality. In a fiercely competitive market, there may be some temptation to slacken the loan scrutiny procedures and this needs to be severely checked," Ms Gopinath says.

Most importantly, has this sharp rise in housing loans triggered off a corresponding boom in other sectors?

Owning a house, say in Mumbai, does create a demand for a washing machine, a fridge, an air conditioner, a computer, apart from interior decoration. If this premise is true, the industry should have been having the best of times and that has not happened in any distinct measure.

Is it because, for most house owners, the loan payments leave little for any luxury spending? Have linkages been built between the housing and other sectors? Then again, housing loans form the `white component' (70-80 per cent) in buying a house in Mumbai with the `black component' making up the rest.

Invariably, most builders insist on the black component as this is what keeps the construction business going. It is quite possible that over the years the black component in housing may have grown at the same pace as the white component. After coughing up the `black', it is hard for the middle class to budget for dressing up their homes. Banks and housing finance companies could think of getting the builders to play fair by linking the sanction of housing loans with zero black payments. Some providers of housing funds have a list of builders and this section could be made to drop the black habit as the loans are directly credited to the accounts of the builders.

Worse is the concept of `super built area' in Mumbai that includes the kerchief size space in front of the lift, and not the actual carpet area of the house in which the house owner is expected to live.

Banks are better placed to make a difference in the nasty business of buying a house.

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